How to Start an Emergency Fund

Starting an emergency fund isn’t hard to do — and automating your savings can help make it easier. Geber86 / Getty Images

The family car goes kaput. Fido’s emergency surgery lands you a four-figure vet bill. You take a hit in the latest round of layoffs at work.

No one wants to think about life’s unexpected disasters — but everyone needs to plan for them.

Enter the emergency fund: the dedicated stash of cash you keep on hand to help you weather those tough times. Creating an emergency fund should be one of the first moves you make when you’re trying to set money goals because you need a safety net for when a nasty money curveball comes your way.

If you’re sheepish to admit that you’ve never had an emergency fund — or the one you did have was wiped out years ago — it’s never too late to build up your savings. Here’s how to establish your emergency fund, starting now.

DETERMINE YOUR SAVINGS GOAL

First things first: How much do you really need to save? That can depend on a number of key factors.

If you have a grand total of — ahem — $0 in dedicated emergency savings, start with a goal equal to one month of your expenses. This should be priority number one, even before you put any extra money toward other goals like paying off your student loans or going full throttle on retirement.

Even paying beyond the minimum on your credit card debt should take a backseat to saving up one month of pay, because the whole point of an emergency fund is to make sure you don’t wrack up more debt when a big unexpected cost comes your way.

Once your one month of savings is in place, you can start tackling those other goals — but you should still keep working toward bigger benchmarks within your emergency fund. Here are some guidelines that can help.

3 months of expenses: This number might make sense for you if your current financial responsibilities are minimal. Read: You’re a renter with no mortgage to pay, and you don’t have children or other people depending on your paycheck. At the same time, you have family or close friends who could take you in if you were seriously struggling.

6 months of expenses: If you’re currently making mortgage payments or have children under 18 (or both!), then it’s smart to sock away at least six months of expenses. Or, if you know that you wouldn’t have a couch to crash on if something disastrous happened, then you should think about having that six-month cushion.

This is the category that likely applies to the biggest group of people. When in doubt, aim for building up to six months.

9 months of expenses: If your cash flow is less than steady or reliable — i.e., you are a freelancer or own your own business — it might make sense to build up to nine months of expenses, using what you bring home in a typical month (post taxes) as your guide. That way, a particularly slow month won’t stand in the way of you being able to cover a broken leg or bum transmission.

FIND A DEDICATED PLACE FOR YOUR SAVINGS

So where should you store those funds? On the one hand, you want the cash to be liquid, so it’s not a huge hassle when you’re scrambling to pay that major plumbing bill. But you also don’t want it to be too accessible. After all, it’s easy to “steal” from your savings for non-emergencies if that money is lumped in with the rest of your cash.

That’s why you should consider keeping your emergency fund in a savings account that’s 1) not tied to the same bank as your checking account and 2) separate from other savings goals you have. If your bank allows it, you might even want to label your emergency fund as “Rainy Day Fund” or “For Emergencies Only,” so you’re mentally reminded that it’s off-limits every time you log in.

Also, consider parking your emergency fund in a high-yield savings account so that you’re earning as much interest as possible on your money while it’s waiting to be used for an emergency.

AUTOMATE YOUR SAVINGS

It may sound counterintuitive, but the less you think about your emergency fund, the better.

Hear us out: Socking away your hard-earned cash when you could be spending it isn’t always fun. But if you set up an automated transfer each month, you’re saving your money before you even realize it’s there — which means you’re less likely to miss it.

You can do this by setting up a recurring transfer from your checking to your emergency savings account each month, or you may even be able to send a portion of your paycheck directly to your emergency fund each payday, if your company allows it.

So think about an amount that you can comfortably transfer on a regular basis that fits within your budget — then set it and forget it. And if you get extra income from bonuses or a side gig, consider sending some extra padding to your emergency fund. Then when that chipped tooth or broken water heater strikes, you may be caught off guard, but your budget won’t.

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Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company and its subsidiaries. Life and disability insurance, annuities, and life insurance with long-term care benefits are issued by The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM). Long-term care insurance is issued by Northwestern Long Term Care Insurance Company, Milwaukee, WI, (NLTC) a subsidiary of NM. Securities are offered through Northwestern Mutual Investment Services, LLC, (NMIS) a subsidiary of NM, broker-dealer, registered investment adviser, member FINRA and SIPC. Fiduciary and fee-based financial planning services are offered through Northwestern Mutual Wealth Management Company® (NMWMC), Milwaukee, WI, a subsidiary of NM and a federal savings bank. Products and services referenced are offered and sold only by appropriately appointed and licensed entities and financial advisors. Not all products and services are available in all states. Not all Northwestern Mutual representatives are advisors. Only those representatives with the titles "Financial Advisor" or "Wealth Management Advisor" are credentialed as NMWMC representatives to provide advisory services.